The Most Detailed Forensic Analysis Of The Flash Crash To Date (And Likely Ever)

Tyler Durden's picture

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nwskii's picture

First Flash Bitchez

More Critical Thinking Wanted's picture

Our friends at Nanex have completed a full forensic analysis of the flash crash, on a tick for tick basis, between the fateful times of 14:42pm and 14:52pm on May 6.


  • Phase I: "quote spam" combined with defensive algos exiting the market at the slightest hint of abnormality, combined with stop loss orders that herded up and drove down prices in a positive feedback loop spiral == trouble and losses to many.
  • Phase II: people with actual brains coming in, realizing the mechanic, non-fundamental nature of the crash and buying up instruments at a fraction of their pre-crash price == goodness and profits to a select few.

One possibility is that the people who came in and bought things up are the same who spammed the quote system to begin with. It takes a lot of guts to buy into such a drop (with other people's money) - so at least one strong buyer had to be aware of the technical nature of the crash straight away ...

It would be interesting to see the list of firms who went net short into this crash and who came out net long.

We can also safely assume that by today the algos have already been written to more efficiently handle phase II. of the crash.

Prediction: more volatility in the future.

Moral of the story: use wider stops and lower leverage when trading long-term positions.

bugs_'s picture

Thank you nanex and Tyler. 

DoChenRollingBearing's picture

You bet, all thanks to NANEX and ZH!

Do they wonder why we don't buy stocks anymore?

I need to go back and study their report more.  Someone else kindly inform us later what the SEC has to say (or not). 

DoChenRollingBearing's picture

Actually I remember the day well.  All morning and early afternoon I had watched the Dow down and down to about -350.

I then decided to take the afternoon off and go shoot some rounds from my two guns.  Normally I listen to talk radio when I drive around but forgot to turn the radio on until I was almost at the range.  The Host of the show said, now we're down 800 points!  I blurted out a quick Holy Shit!  Couple of minutes later I arrived at the range, so I called my brother to see if this was true.  He was not aware of it, and then Schnitt came back on said now we're down 900!

I then thought, wow I picked a bad day to leave, but I'm here so I'm shooting.  All the while thinking, I wonder what we're going to be down when I come back out...

And they brought it mostly back...  HFT and PPT.

Nacho.Libre's picture

What a funny story.  I had walked into the local shooting range and all the lanes were taken, so I asked the guy if I could change the channel to see what was going on in the market.  The thing was about 2/3 of the way through the tanking process and the commentator was looking and acting very panicky.  I turned to my buddy who's jaw had dropped and asked him "did you move your 401(k) money into bonds last month like I told you to?" To which he replied "F#@*!", meaning, he hadn't. 


The though that ran through my mind at the moment was "well, if I'm going to be somewhere when all hell breaks loose, it might as well be at a place full of guns and ammo and guys who know how to use it." LOL

More Critical Thinking Wanted's picture

The though that ran through my mind at the moment was "well, if I'm going to be somewhere when all hell breaks loose, it might as well be at a place full of guns and ammo and guys who know how to use it." LOL


Seriously - if history taught us one thing it's the fact that the worst place to be in when any major revolution starts is to be near places that store armaments and ammunition. It's the first strategic place to be attacked and looted. If you want to fight it's certainly a very good place. If you want to live, it's pretty much the worst place to be. YMMV.

JohnKing's picture

This is way over Shapiros pay grade. That afternoon "Audit the Fed" died, JPM sent a flash to the Senate.



Rick64's picture

Agree, fully orchestrated. Huge support for audit the FED bill then all of a sudden a new watered down version (with a million stipulations in it) is offered and support for the original bill was gone.

JohnKing's picture

It brings extended meaning to "don't fight the Fed".

aint no fortunate son's picture

I'm gonna wait for Barry Ritholz's analysis of the event... I believe he's the authoritative expert on shit like this.

Cool graphics tho - reminds me of the first time I dropped purple blotter and saw the birth of the universe firsthand.

Glass Steagall's picture

Blue Unicorn... those were the days.

euclidean's picture

Why? You think he can add something to this?

In reviewing these regulations:

1) Delivering market data through premium products ahead of transmission to a Network processor would seem to violate Rules 603(a) and 603(a)(2) of Regulation NMS.

2) Placing orders for which one has no intent to execute would seem to violate Section 9(a)(1)(A) of the Securities Exchange Act.

Yep, I can see how you might find the Nanex stuff a bit confusing.

euclidean's picture

Read IV Recommendations - it contains such jewels as the link to previous Nanex recommendations -

1. Quote and trade data must have time stamps reflecting when they were generated. This will ensure delays can be detected by everyone.

2. Quote-stuffing should be banned.
3. Add a simple 50 millisecond quote expiration rule: a quote must remain active until it is executed or 50ms elapses.

(What is the point of having a National Best Bid/Offer, if not everyone in your nation (apologies to Alaska/Hawaii) can reasonably execute a trade against it? )

A minimum quote life rule has far less chance for unintended consequences.

Ban exchanges from providing direct feeds that contain core quote and trade information. Current regulations (Reg NMS, rule 603(a)) prohibits direct exchange feeds from transmitting this core data to a vendor any sooner than it transmits the data to a Network processor (e.g. CQS).

(this last one is a doozy)

Finally, we think a solution exists without new rules and regulations: if only the SEC would enforce, or at the very least provide guidance to, existing rules and regulations.


All no doubt to be sensibly removed from any SEC recommendation. All in the goodness of the time it takes to stuff 25000 quotes into your equity of choice. Woar! WOAR! (that's the sound of a toothless tiger approaching) .

williambanzai7's picture

Now they should do a simultaneous scan of Mary Schapiros brain.

Everyman's picture

What would be so interesting about a straight line?

carbonmutant's picture

It's fascinating that the DJI wasn't better correlated with the other indexes...

I assume the bots reached bottom first...

tom a taxpayer's picture

Nanex - Boldly Going Where No SEC Has Gone Before.

ShankyS's picture

LOL, NANEX produces this on thier budget. Can't wait to see what Shapiros $1bn budget group delivers. Gonna be like comparing a ZH post to a Ritholz post I'm guessing.

DonS's picture

dude anyone outside the market knows it was all manipulated....they brought that shit down like a stratton oakmont ipo than ripped it up again...its so obvious 

Number 156's picture

SEC. What a joke.

Boilermaker's picture

The massive selling side of the equation is obvious.  The BUYING side is the questionable part.  On some of the buying spikes, are their ANY private firms or funds large enough to execute such enormous transactions?  Furthermore, why the fuck would they put that kind of money at risk at that moment.

Honestly, isn't this the smoking gun that the gov't purchased the insta-miracle-rally immediately after and during the crash?

DrFever's picture

I said all along that this flash crash was orchestrated by the boys over at Goldman Sachs.  Weren't they being called to the carpet by Congress in and around that same time period?  They gave the markets a royal "see what happens when you try to fuck with us" salute!!!  Greece was the false flag.....Goldman Sachs giving the market the finger for being called to testify over the Paulson tip-off was the real reason.

Nacho.Libre's picture

yeah, if I remember correctly, they were going be voting in the senate on the financial reform bill that had "audit the fed" language in it.  But after the crash, well, it all went away.

cswjr's picture

Wow.  Those guys are good.  Maybe we can petition the next Congress to replace the SEC en masse with Nanex?

illyia's picture

Thank you Tyler and Nanex.

This will take a while... quite a while...

It's nice to know that someone easily understands these levels of complexity...?



Thomas's picture

I think they shot the golden goose. Their hubris will come back and bite them in the ass.

99er's picture

WTF? All you need is $225MM?

"The sale of $125 million worth of Chicago Mercantile Exchange S&P500 stock index e-mini futures contracts at 2:42 p.m. (1842 GMT) on May 6, followed 25 milliseconds later by the sale of more than $100 million worth of popular exchange-traded funds (ETFs) appears to have triggered the sell-off, datafeed vendor Nanex LLC said."

A lot of troublemakers have that money. And current prices appear vulnerable....

Chart: ES and ZB

SV's picture

Nanex's recommendation is too nice! Should make it a 1 sec quote min.  That would cut out a majority of this crap...

nasa's picture

When do the perp walks start?

Everyman's picture

BTW I thought that "quote stuffing" was illegal in making a bid with no intention to sell or buy?

FOR THE SEC READERS (I know you are slow, but this is what is called a FIX.):



  1. Quote and trade data must have time stamps reflecting when they were generated. This will ensure delays can be detected by everyone.

    Reasoning: Changing the procedure to time stamp at the time a quote or trade is generated is a near trivial exercise. It probably comes as a surprise to many that time stamping isn't done that way now.

  2. Quote-stuffing should be banned.

    Reasoning: It is a manipulative device designed to overload the quotation system. Quote and trade dissemination (data feed) is a finite resource, and should be treated as such.

  3. Add a simple 50 millisecond quote expiration rule: a quote must remain active until it is executed or 50ms elapses. If the quote is part of the NBBO, it may be improved (higher bid or lower offer price) at any time without waiting for the expiration period.

    Reasoning: The exchanges must protect the integrity of the National Best Bid/Offer system. What is the point of having a National Best Bid/Offer, if not everyone in your nation (apologies to Alaska/Hawaii) can reasonably execute a trade against it? 50ms is approximately the time it takes light and electronic communication to travel from New York to California and back. It is impossible to transmit information any faster. This rule would not limit quote/trade rates. So long as trades are executing, quotes can update thousands of times a second. Only a small percentage of quotes today would be affected and the potential for catastrophically high rates would be eliminated.

Waterfallsparkles's picture

You for got the most important issue the sub penny bids.  They step in front of an existing bid by a tenth of a penny.  No one else can place a trade for a sub penny. This can be used to manipulate the market.  Plus, what right do they have to steal the bid or ask from a standing order.  They should have to get in line with everyone else.

Grand Supercycle's picture

S&P500 financial index - an important chart:

StychoKiller's picture

All that appeared on ZeroHedge first -- good to see "some" of the MSM did not get the memo about NOT reporting on the flash crash!

poydras's picture

As I recall, the JPY rose quite materially in advance of the crash.  Perhaps someone with the data can produce an overlay.

Perhaps some prop group unwound their play and discovered far less liquidity than expected.

daneskold's picture

Funny coincidence.

I watched Wall Street again tonight for kicks.


May 6?


Gordon Gekko's birthday.  

The day that Bud Fox bagged the elephant.

Flash Crash May 6.

Someone playing a joke on the street?




Maybe not.

TraderTimm's picture

Dude, I popped in the DVD just to check. No shit. May 6, 1985 Gekko's Birthday. Damn.

fuu's picture

That may be the most beautiful chart I have ever seen. Bravo!

vs18's picture

Crazy shit but you got beaten by hours by Ritholz and the WSJ... just saying.

Miles Kendig's picture

One would hope the WSJ could manage it once in a while.

Freewheelin Franklin's picture

I haven't read the report yet. Does it mention that it happened on the very same day that Bernie "Back-Stabber" Sanders had a meeting with Bernenke, to "discuss" the Audit the Fed Amendment pending in the Senate Financial Reform Bill?

Waterfallsparkles's picture

One of these days they will not pull it back up.  What would have happened if it closed there?

pamriallc's picture

like in grade-school.  someone would call "do over!" and it fixes itself over time like every mean reverting system always had fixed itself over a long enough period of time.  unless someone owns a single asset---  tulips perhaps?  you're AOK because systems are terribly consistent in that at the macro-level--- they are all mean reverting systems